Loans

Bank Loans vs. Credit Cards: What You Need to Know

Bank Loans vs. Credit Cards: What You Need to Know

Making a major purchase, whether it be a piece of furniture, a boat or some new gear for your hobby, means you’ll need a way to fund the expenditures.

When you don’t have the cash available, bank loans and credit cards are two options to consider, but the differences between them are important to understand.

Small vs. Large Purchases

Before you can decide if a bank loan or a credit card is the right answer for you, consider the size of the purchase. Going through the process of getting approved for a bank loan is generally not worth the hassle if you are buying something that costs a few hundred dollars. You want to save bank loans for times when you really need cash and no other options are available.

Time to Pay The Loan Back

You also must think about how long it is going to take you to get the money back to pay for the loan or the credit card bill. If you anticipate it being a long time, a bank loan is generally a better idea. The payback time for these loans is usually spread out over a longer period of time, (may be months or years) whereas your credit card will likely build up too much in interest over that amount of time.

Your Credit Score

Every time you take out a loan or make a purchase on your credit card, consider the effect it has on your credit score. Credit cards are revolving debt, which means that once you pay it off, you can just rack the amounts back up again. As a result, you’ll often find that credit cards are more detrimental to your credit score than are bank loans. However, speaking with your accountant or financial adviser to determine the specifics of this situation is necessary. Thankfully, credit score can be redeemed with the right guidance.

Interest Rates

When you pay back a loan or pay off a credit card, you are not just paying the principal amount; you also have interest rates added onto the loan. Interest rates vary depending upon the current financial climate and where your credit scores stand. The goal is to have as low of an interest rate as possible so that you are not paying an excessive amount of extra money. Comparing the interest rates from your bank to the rates of a desired credit card is the best way to figure this element out.

Whether You’ll Be Approved

None of this information matters if you are unable to get approved for a particular loan or credit card. Having too many denials can hurt your credit card, so you want to be prudent about how many applications you send in. Sometimes, obtaining a bank loan can be easier because you’re working with an actual person. On the other hand, getting approved for a credit card can be the less challenging method because they are generally for smaller amounts than bank loans.

Considering the overall payback cost as well as whether you can get approved will let you see which choice is right for you.

About author

Master of the budgets. Provider of the tips. Author and owner of DumbFunded.co.uk.